Book Review: Fooled By Randomness

Fooled By Randomness was unquestionably the best non-fiction book I read in 2005. The author – Nassim Nicholas Taleb – is a magnificent writer, deeply intellectual, and delightfully blunt. While one could interpret his style as arrogant, I chose to view it differently, especially given his endless self-deprecating remarks. I don’t know Taleb, but I’m going to assume that he’s simply an enlightened guy that feels compelled to say exactly what is on his mind in the clearest way possible.

This book is subtitled “The Hidden Role of Chance in Life and in the Markets” and – in my opinion – is a must read for anyone that ever thinks about probability or statistics (or has ever said a phrase like “sunk cost.”) In college, I struggled with 6.041 – Probabilistic Systems Analysis & Applied Probability (it was the only C I got as an undergrad) and felt like I was a week behind the entire class (e.g. I eventually got it, just a week after the problem set was due, or the test occurred.) As a grad student I breezed through 15.071 – Decision Methodologies for Managers not necessarily because I was smarter, but because MIT Course 15 classes are much easier than MIT Course 6 classes.

When I grabbed Taleb’s book, I had some flashbacks to 6.041. Fortunately, Taleb’s book was extraordinarily easy to understand, even though some of the subject matter was congruent to 6.041. Fooled By Randomness tackles classic probability theory (or – in Taleb-speak “the philosophy of randomness”) in a way that anyone with a college degree can understand using the financial markets as the backdrop for discussion. Taleb loves dramatic examples which is a great way to understand this stuff as you end up with an extremely memorable heuristic for understanding something that could easily devolve into complex theory.

Oh – and he’s funny as hell. I rarely laugh out loud when reading a non-fiction book – Taleb got a few deep belly laughs out of me. He manages to demonstration his range of interests by weaving some philosophy and history into the book, although each time I tested one of Taleb’s assertions about Hume or Popper on Amy, she went of on a rant that made me remember how difficult it was for me to read and understand this stuff.

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I see both our favorite non fiction books of the year came at the very end. I’ll read this one, but you must also read The Blank Slate, which i just blogged. In particular you may like the section on Gender which raises some issues that NCWIT is grappling with.

Would echo your sentiments on the book. Beyond being a great storyteller, Taleb is particularly effective at providing readers the simple math that shows how the law of averages can account for a mutual fund outperforming the market for a given number of years, making its managers look like geniuses, and then poof, they are also-rans.

As much as anything, his book is a well-articulated reminder that counting on past performance being predictive of future performance is a fool’s bet.

Then again, as the recurring boom-bust cycles of tech and real estate show, people default into assuming a level of predictability that just isn’t grounded in reality.

p.s. if you are not yet satiated on the finance and macro analysis topic, The Vital Few vs. The Trivial Many is a really concise and effective read on information arbitrage in financial markets. It provides a powerful metaphor for reading the pulse of markets in general. Have written a couple posts on the topic on my blog.

Cheers,

Mark

druce

You might also enjoy How We Know What Isn’t So, by Thomas Gilovich, http://www.amazon.com/gp/product/0029117062 . It’s a great exposition of a wide range of failings in human analysis and decisionmaking, not just probability.

I enjoyed Taleb, also as an amusing study of that particularly annoying breed of Wall Street ‘intellectual’ (an oxymoron) that thinks because they understand certain mathematics, they’re deserving of great success and respect, and others’ success is due entirely to luck.

They can be pretty philosophical about why other people lose money, but their egos are sometimes just as crushed when the gods of chance turn against them.